An integration by parts formula in a Markovian regime switching model and application to sensitivity analysis. Issue 5 (3rd September 2017)

• Record Type: Journal Article
• Authors: Liu, Yue; Privault, Nicolas
• Is Part Of: Stochastic analysis and applications. Volume 35:Issue 5(2017)
• Page Start: 919
• Page End: 940
• Publication Date: 2017-09-03
• Subjects: Integration by parts -- Markov chains -- regime switching -- sensitivity analysis; 60G40 -- 35R35 -- 93E20 -- 60J28 -- 91G80; Stochastic analysis -- Periodicals; 519.2205
• DOI: 10.1080/07362994.2017.1339613
• Languages: English
• ISSNs: 0736-2994

Abstract

ABSTRACT: We establish an integration by parts formula for the random functionals of a continuous-time Markov chain, based on partial differentiation with respect to jump times. In comparison with existing methods, our approach does not rely on the Girsanov theorem and it imposes less restrictions on the choice of directions of differentiation, while assuming additional continuity conditions on the considered functionals. As an application we compute sensitivities (Greeks) using stochastic weights in an asset price model with Markovian regime switching.